MUMBAI: Securities & Exchange Board of India (Sebi) may examine the role of merchant bankers in DLF's maiden equity offering in 2007, a prospect that has caused considerable disquiet among the fraternity. Though the capital market regulator is yet to send a legal notice to any of the investment banks involved with the real estate developer's initial public offer (IPO), bankers are worried about the implications of the recent Sebi order on the way they operate.

Some bankers are in touch with Sebi officials to understand the regulator's thinking about the ambit of their responsibility when it comes to disclosures made by clients, said three senior investment bankers aware of the interactions with the regulators. They spoke on condition of anonymity.

On Monday, Sebi barred DLF and its promoters from accessing the capital markets for three years for not disclosing material information to investors. DLF on Friday filed an appeal before the Securities Appellate Tribunal — a quasi-judicial body — challenging the order. I-banks involved in the IPO were DSP Merrill Lynch, Kotak, Citigroup, Lehman Brothers, Deutsche Equities, ICICI Securities, UBS Securities and SBI Capital Markets.

"Investment bankers primarily rely on chartered accountants and lawyers to verify the information provided by the company for a public offer. We don't do independent due diligence," said an i-banker with a local investment bank. "For tax issues, bankers verify with the chartered accountants and other company-related matters with the lawyers. In fact, in the prospectus, investment bankers say the information documented is based on disclosures given by chartered accountants and lawyers as it's re-validated and confirmed by them. Bankers only file it with Sebi," he said.

The primary responsibility to make sure that all disclosures have been made does indeed rest upon the company and its directors, lawyers say. But merchant bankers have to ensure they carry out proper due diligence.

"From a regulatory perspective, the disclosure obligation cannot be contracted away. The regulator will penalise those it can under the law. However, there are two aspects — first, under the relevant regulations and guidelines, which will be enforced by the regulator against those who it regulates; and second, under the contractual relationship between the company and its advisors, which will be enforced by the parties to the contract," said Suhail Nathani, partner of law firm Economic Laws Practice.

The company, in a press statement, on Monday said its board was guided by and acted on the advice of eminent legal advisors, merchant bankers and audit firms while formulating its offer documents. Some lawyers said the regulator can proceed against merchant bankers as well as audit firms following the precedent set by the travails of Price Waterhouse — the auditors of erstwhile Satyam Computers, which imploded in 2008.

Unlike merchant bankers, law firms and auditors are not registered with Sebi, but if they provide advice on dealing in securities market then they can come under the regulator's jurisdiction as they are persons associated with the securities market. In 2010, the Bombay High Court ruled on a writ petition filed by Price Waterhouse challenging Sebi's jurisdiction over it that audit forms could come under the market regulator's scanner if there was a criminal nexus between a company and its auditors. There has been no further development in the matter since then.

"On the lines of the Price Waterhouse judgement, one would not tiate action against merchant bankers to the issue, if they are found negligent or accomplice in the suppression of true and correct position. Sebi has already issued orders against DLF, which would go a long way from corporate governance standard point of view," said Vaneesa Abhishek, a practising lawyer.

In DLF's red herring prospectus, it was stated that Sebi reserves the right to take up at any point of time, with the book runners, any irregularities or lapses in the prospectus. "Under the code of conduct for merchant bankers, they are required to exercise due diligence and make all efforts to protect the interests of investors. They are also responsible for ensuring that adequate disclosures are made to investors in accordance with applicable regulations. Merchant bankers are also supposed to certify that the disclosures made in the prospectus are true, fair and adequate," Abhishek said.

Globally, there are numerous cases where regulators have hauled up law firms and banks for not doing proper due diligence in capital market issues. Key legal advisors listed on the DLF IPO document include AZB Partners and White & Case as counsel to DLF, and Luthra & Luthra and Linklaters to the book runners or bankers. Amarchand & Mangaldas, the country's largest law firm, was appointed as special legal counsel to the issue.

"Sebi can take action by way of suspension or cancellation of registration certificate, prohibition from taking further assignments or warning, etc, against the merchant banker involved in the public issue of DLF alleging negligence in conducting diligence and non-disclosure of 'critical' information by DLF in the prospectus," said Sanjay Israni, senior partner, Rajani, Singhania & Partners.

Not surprisingly, investment bankers disagree. "This raises bigger industry issues. Do you have the bandwidth and time to carry out full due diligence if the company just doesn't disclose?" asked a senior banker with a foreign bank.

Legal consultants and auditors could be held responsible in the DLF case under the current Companies Act enacted in 2013, some experts say. However, in India, documentation is usually structured to absolve both the bankers and legal experts, said a lawyer who has participated in over a dozen Indian listings. "At best, the company could sue the law firm for inadequate diligence, but usually that will circle around disclosures made by the company as such clauses are included," he added.

Since the DLF IPO happened in 2007, when the 1956 Companies Act was enforceable, in the current DLF case none of the consultants is likely to come under the scanner, said one of the lawyers involved in the offering.